When One Puts on a Trade to Take Advantage of an Abnormal

question 14

Multiple Choice

When one puts on a trade to take advantage of an abnormal spread that one hopes will converge to the normal spread,which of the following is true?

• A) Spread trades only work when the underlying prices of the two securities increase together.
• B) A spread trade is always an arbitrage opportunity across time.
• C) A spread trade works regardless of whether the underlying prices of the two securities increase or decrease.
• D) A spread trade is always an arbitrage opportunity across space.
• E) Spread trades always have a positive probability of losing money.

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Definitions:

Repossesses

The action of taking back possession of property, typically by a seller or lender, from the buyer or borrower due to non-compliance with the terms of sale or loan.

Consequential Damages

Damages that do not directly arise from the breach of a contract but result from the breach's indirect effects.

Inventory

The total amount of goods and materials on hand available for sale to customers in the course of business operations.

Consumer Goods

Items bought for personal use or consumption, including household products, food, and clothing.